Mortgage settlement will send billions to struggling homeowners

Almost 4 million homeowners might receive cash compensation and mortgage relief in a multi-billion-dollar settlement with 10 major banks, government regulators announced Monday.

Bank of America, JPMorgan Chase, Wells Fargo and seven other mortgage-servicing companies have agreed to give borrowers $3.3 billion in direct payments and $5.2 billion in the form of loan modifications and other assistance to settle allegations that they wrongly foreclosed on homeowners in 2009 and 2010. The other lenders are Citibank, MetLife Bank, PNC, Sovereign, SunTrust, U.S. Bank and Aurora.

Eligible homeowners may receive payments that range from hundreds of dollars to $125,000, depending on the type of error.

The settlement amounts to a mea culpa by mortgage servicers, who are effectively bill collectors for investors who collectively own mortgages that have been pooled together, often by Wall Street firms, into complex bonds called mortgage-backed securities.

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Many servicers were first set up by Wall Street banks, such as Bear Stearns and Lehman Brothers, that disappeared or collapsed during the U.S. financial crisis in 2008. Wall Street banks infamously looked past poor underwriting, particularly in boom states such as Florida and California, because the buck was passed to unsuspecting investors, who thought they were buying AAA-rated mortgage bonds, prompting the slogan, “A rolling loan gathers no loss.”

However, as more and more borrowers failed to meet their mortgage commitments or saw their home values plunge, a housing crisis gained steam in 2008 and 2009. Servicers were overwhelmed with requests for loan modifications, and the problem of homes that now are worth less than the mortgages they carry continues to bedevil the housing market.

The agreement announced Monday ends an “independent foreclosure review” of 4 million loan files mandated in a 2011 enforcement action by the Office of the Comptroller of the Currency and the Federal Reserve. The costly and time-consuming process required banks to hire independent consultants to review the files on a case-by-case basis to identify mistakes such as lost paperwork, miscalculated payments, illegal fees and other slipshod mortgage servicing and foreclosure practices.

The Government Accountability Office reported in July that the review was too complex and borrowers “might not be motivated to participate.”

Regulators said the settlement announcement Monday would provide more speedy relief to borrowers, who now will receive compensation regardless of whether they’ve filed requests for review.

Bank officials said they were pleased to have the independent foreclosure review behind them.

“We have helped nearly 1 million homeowners avoid foreclosure over the last four years and will continue to help others who may be struggling to make their payments,” JPMorgan Chase spokeswoman Amy Bonitatibus said.

Consumer advocates welcomed the decision to replace the failed review process with a settlement that will return at least some cash to victims of unfair banking practices. But they said many problems remained.

“The money is grossly inadequate for homeowners, and the program will require careful oversight to ensure that all homeowners harmed get a fair chance at benefits,” said Ed Mierzwinski, the consumer program director for U.S. PIRG, a nonprofit advocacy group.

“Finally, of course, we need strong federal mortgage-servicing standards to protect all homeowners from the unfair and incompetent servicing and foreclosure practices that have driven many out of their minds due to lost, wrong or even illegally prepared paperwork and forced far too many more out of their homes,” Mierzwinski said.

Monday’s settlement came on the heels of a massive $25 billion settlement last February between 49 state attorneys and five major banks: Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial. The banks acknowledged abuses in the foreclosure process such as robo-signing, in which documents were processed without proper documentation and often with forged signatures.

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Details of how Monday’s settlement will work remain murky, said Kathleen Day, a spokeswoman for the Center for Responsible Lending, a nonprofit advocacy group based in Durham, N.C.

Strong enforcement provisions are needed to ensure that the money and relief are allocated in the best and fairest way possible, Day said.

“We’re hoping there will be incentives in there for banks to give mortgage forgiveness in a way that keeps people in their homes and avoids foreclosure,” she said.

Mortgage relief doesn’t do much good if it forces homeowners into short sales, for example, Day said, meaning that the banks forgive borrowers’ debts if they sell their properties for less than they owe. “A short sale is effectively a foreclosure,” Day said. “It’s a fire sale.”

Leaders in the House Committee on Oversight and Government Reform had sent a letter to regulators Friday to request a briefing before any new settlement was reached or announced publicly.

U.S. Rep. Elijah E. Cummings of Maryland, the committee’s top Democrat, said he was deeply disappointed that government watchdogs had finalized the agreement before answering questions from Congress about how the settlement amount was determined, how money would be distributed and what would happen to other families abused by mortgage-servicing companies who hadn’t yet had their cases reviewed.

“I do not know what the rush was to make this settlement without answering these key questions, and although I look forward to obtaining information about how this deal may assist homeowners, I have serious concerns that this settlement may allow banks to skirt what they owe and sweep past abuses under the rug without determining the full harm borrowers have suffered,” Cummings said..

A payment agent will contact eligible homeowners by the end of March to administer payments, regulators said. Those affected by the settlement don’t need to take any action, they said.

The settlement affirms much of what McClatchy and other news organizations have chronicled in recent years as homeowners struggled for help to avoid losing their homes. A series of McClatchy stories in 2010 and 2011 documented how servicers, many owned by major banks, routinely lost borrowers’ paperwork and often foreclosed on the very people whose loans they supposedly were modifying.

“Part of it had to do with not enough manpower to handle the inquiries for help, and their solution was . . . inaccurate information to the borrowers,” said George Bosch, the legal administrator for the Los Angeles-area law office of Edward Lopez and Rick Gaxiola.

Bosch, whose firm helps troubled borrowers, worried that the settlement might not reach the affected borrowers, many of whom have lost their homes and continue to hide from bill collectors.

“Even when attorneys are involved, people have gone into hiding, because they have collection calls all the time. They’re not leaving forwarding addresses,” he said. “I’d say 50 percent of these people never gave forwarding addresses."

Also on Monday, Bank of America announced a separate settlement in which it will pay mortgage giant Fannie Mae $3.6 billion and buy back more than 30,000 loans to resolve a long-running dispute between the two. The Charlotte, N.C.,-based bank will pay more than $10 billion in total.

The settlement covers mortgages totaling about $1.4 trillion originated primarily by Countrywide Financial Corp. and sold to Fannie Mae from 2000 to 2008.

After they started to go sour, Fannie Mae sought to force Bank of America – which bought Countrywide in 2008 – to buy them back, claiming that the bank had misrepresented the quality of the loans. The two battled over the loans for at least a year.

A large portion of the settlement will be paid out of the bank’s reserves. The agreements will cut into Bank of America’s fourth-quarter earnings by about $2.7 billion, the bank said.

Fannie Mae said the 30,000 loans that Bank of America was repurchasing had the potential “to cause significant future losses.” Fannie is still under conservatorship by the Federal Housing Finance Agency.

Andrew Dunn of The Charlotte Observer contributed to this report from Charlotte, N.C.